Ray Dalia, Founder of Bridgewater Associates said: ”You’re going to be wrong a fair amount of times; so the issue is, how do you be wrong well?” Reading about Randal Quarles, the Federal Reserve’s first-ever vice chair of supervision recusing himself from matters related to Wells Fargo, I asked myself that question, “how do you be wrong well?”
This incident doesn’t strike me as being wrong well.
Given the situation, Mr. Quarles recusing himself is puzzling and frankly raised some red flags for me. There are multiple dimensions of ethics and accompanying issues I question. We all make a fair amount of mistakes and in this case, the mistake may well be costly and not done as well as it should be for the sake of the country.
Mr. Quarles is our country’s top banking regulator. Wells Fargo is the third largest bank in the United States and has been under intense regulatory scrutiny as a result of many blatant ethics violations, from opening new accounts without their customer’s knowledge to charging unnecessary car insurance fees to car loan customers.
There is no argument that anyone in such a critical position should recuse himself from making any decisions which could directly or indirectly be viewed as a conflict of interest. With that premise, I am in agreement. However, before taking the position, Mr. Quarles divested himself of any interests he had with Wells Fargo. So what’s the issue?
First, Wells Fargo is such a major player in the banking industry virtually all decisions related to regulating the industry could impact Wells Fargo. And Mr. Quarles would have been at the helm of such decisions. Not now. Now he’s opened the door to a potential huge deficit.
The issue causing this sudden recusal is related to his wife’s family and their involvement with Wells Fargo. Mr. Quarles father-in-law Spencer F. Eccles is currently Chairman Emeritus of Wells Fargo’s Inter Mountain Banking Region. He was Chairman & Chief Executive of First Security Corporation of Salt Lake City which was sold to Wells Fargo in 2000. Mr. Quarles brother-in-law Spencer P. Eccles was previously ”affiliated” with Wells Capital Management which is part of Wells Fargo.
Yes, the Eccles family ties are indeed extensive and were well known prior to the Quarles appointment. So the question I ask is why two months after Mr. Quarles appointment is he recusing himself? To what point? His father-in–law’s position as Chairman Emeritus is an honorary one. He has no formal role or responsibility in how the bank conducts its business.
Mr. Quarles is and will be a critical voice in how our central bank rethinks its approach to bank supervision. Yet he believes, given the former family ties to Wells Fargo it is necessary to bow out from all Fed decisions regarding Wells Fargo. In a memo to Mark Van Der Weide, the Federal Reserves’ chief counsel he said: “I have made this decision in order to avoid even the appearance of a conflict.”
I acknowledge this is important as there have been so many contentious prior conflicts of interest with government appointees which have been at the core of a continuous revolving door. The revolving door on ethical or fraudulent behaviors from Wall Street to high government positions and back again has been especially egregious.
The continued hiring of banking executives to government positions which puts them in a tenuous position to act on ethical or fraudulent misrepresentations by banks they were formally involved in or represented is legion. Some of these same individuals are hell bent on slashing regulations; which may well benefit their former companies or clients.
On the other hand, how is it possible Mr. Quarles will be able to satisfactorily oversee his responsibilities as vice chairman of supervision, one of the most important and powerful in banking? How will this decision affect his regulatory responsibilities and the development of supervisory policies and rules that will apply to banking organizations. I have to question how as it deals with regulatory decisions can the Fed’s supervisory function possibly be effective if its leader for these issues will not involve himself in any way with the regulation or supervision of the U.S. third-largest bank.
One of the questions raised is, is this another example yet again of the revolving door issue?
As I’ve said before, the revolving door which exists in government and on Wall Street, where the Wall Street sends key individuals to government; they serve in the Department of Justice, the Treasury, the Securities and Exchange Commission and the list just goes on. They serve in a government position knowing that their real reward is coming full circle – they come back home to Wall Street or serving Wall Street via the law firms which pander to them and reap huge financial rewards. From former attorney general Eric Holder, Goldman Sachs’ executives, the Federal Reserve Bank, the list is long and goes on and on and on!
Well, if you’re coming back to play on Wall Street – or the Fed, you sure don’t want to alienate your banking buddies or decisions that may impact them adversely or prosecuting them for fraud and intentional wrongdoing. Heaven forbid you would hold them accountable!.
Mr. Quarles may be doing the right thing yet at what cost? This decision could be a significant hardship forcing all Federal Reserve staff to treat Wells Fargo as a special case.
And that by itself is an ethical issue.
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Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
